The Indian Economy-ii

The Indian Economy : Dealing With Inflation

Introduction “ The main instrument that the Finance Minister has used in the budget is fiscal controls which will show results in three months .Fiscal deficit at 3.3% of GDP is the lowest in 25 years . But price controls are measures which should be left to the market to decide .” - Amit Mitra, Secretary General , FICCI , in

“ The current rate of inflation is not as high as 2000-01. The (then) Government took 12-18 months to moderate inflation rate in 2000-01. Inflation spurts in the past have been moderated and we are confident of moderating the current rise. We will continue to take fiscal, monetary and supply side steps to moderate inflation rate”

Objective :  What

is Inflation ?

 Why

it occurred ?

 How

to curb it ?

What is Inflation? An increase in inflation figure occurs when there is an increase in the average level of prices in goods and services that projects the Indian economy. Inflation happens when there are less goods and more buyers, this will result in increase in the price of goods, since there is more demand and less supply of the goods. In early 2007, in India , the inflation rate , as measured by WPI, hovered

Basic Terminology: Repo Rate Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which our banks borrow rupees from RBI CRR( Cash Reserve Ratio ) Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI.RBI is using this

SLR (Statutory Liquidity Ratio) : Amount a commercial bank needs to maintain in the form of cash, or gold or govt. approved securities (Bonds) before providing credit to its customers.SLR rate is determined and maintained by the RBI to control the expansion of bank credit. Dual Exchange Rate A situation in which there is a fixed official exchange rate and an illegal market-determined parallel exchange

Prime Lending Rates (PLR) Rate at which a bank offers loans to prime borrowers. The interest rates fluctuate due to the fact that the PLR is not in a direct correlation with the rise and fall of the interest rate. Firsttime borrowers are offered loans at discounted current prime lending rate, and therefore most offers are below the PLR.

Causes of Inflation :  Increase in money supply.  Slow agricultural growth.  Rise in global oil prices.  Increase in prices of food articles

(caused by increased demand as well as supply constraints).  Rise in prices of cement .

contd.  Economic growth.  Inadequate distribution links.  Poor storage and processing capacity.  Increase in price of manufactured

products.

Measures taken by GOI and RBI RBI:  Increase

in Repo Rate, Cash Reserve

Ratio.  Reduction

in rate of interest on cash deposited by banks with RBI.

 Increase

in bank rate .

Measures contd… GOI:

“ As far as inflation is concerned we are adopting of multi prolonged strategy that will yield results soon” - ManmohanSingh (Prime Minister OF India )

 Cut

in petrol price , diesel price.

ü Retailing price(petrol-Rs42.85,diesel-Rs30.25)

 Raising

taxes

ü Education cess(3%)

Measures Contd..  Cut in import duties. The prices are rising because supplies have not kept pace with demand in a fast growing economy and we are trying to see where these supply gasp are coming from. If need arises imports will be made more flexible” – KAMAL NATH ( Minister of Commerce ) ü GOI cut import duties on cooking oil,cement,and other products. ü Banned future trading of tur,urad,wheat& rice. ü Wheat tariff on wheat zeroed.

Perspectives :  Traditional anti-inflation measures .  Increase in Repo rate & CRR.  Cut in crude oil price .  Rupee appreciation.  Hoarding of food grains.  Government decision to ban future

trading.

Future Outlook  In

2006-07 , RBI handled inflation without changing interest rate .  Inflation & investment- reduction in the confidence level of investors.  Driving forces in emerging & developing countries.  Inflation & money supply.  Recently Central Bank cut the repo rate to 7.5% & CRR to 5.5% .  Inflation rate eases to below 11% (10.68%).  Who does inflation hurt most?

Conclusion : 1. Inflation means : chasing few goods out of too much money . 2. Basic reasons : 1. Increase in food grain prices 2. Increase in oil prices 3. Measures taken : 1. Monetary

4. Long run measures are still in question. 5. Inflation may drop down in future .